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Whilst it remains clear that there is no general doctrine of good faith in English contract law, this case is a further instance of the implication of ethical standards into a commercial contract, following the decision of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) (see post).

Yam Seng suggested that duties of good faith were more likely to be implied into so-called “relational” contracts – contracts which involve a longer-term relationship between the parties and which may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence. The examples given were joint venture agreements, franchise agreements and long term distributorship agreements.

In the subsequent decision of Bristol Groundschool Limited v Whittingham [2014] EWHC 2145 (see post), it was found that a contract relating to the development of computer-based training materials (described by counsel for the defendant as a “hybrid” between two of these categories) was a “relational” contract containing an implied duty of good faith. The contract in the present case did not fall within any of the categories, but the court described it as a “relational contract par excellence” through the application of the general principles summarised in Yam Seng. These decisions may therefore be seen to indicate an incremental broadening of the circumstances in which a duty of good faith, or the equivalent, might be implied.

Given the ease with which many contracts could potentially be described as “relational”, commercial parties should exercise caution, not only when negotiating the terms of any agreement, when it may be advisable to consider addressing the matter expressly, but also when performing their obligations. Joanne Keillor, a senior associate in our dispute resolution team, considers the D&G decision further below.

Background

The claimant vehicle recovery business, D&G Cars, was contracted by the Essex Police Authority to recover vehicles for the Authority in certain circumstances. The contract set out the procedure for disposing of recovered vehicles. Certain vehicles had to be crushed to ensure that no identifiable part could be used on other vehicles.

D&G did not carry out the Authority’s instruction to crush one such vehicle, which instead (with different number plates and identification number) became part of its own fleet of vehicles. D&G’s explanation, which was accepted by the court, was that the body swap had been undertaken as a training exercise for its apprentices.

The contract provided that the Authority could terminate the contract in the event of material breach and the Authority had purported to exercise its right to do so.

Decision

The court (Dove J) held that the Authority had been entitled to terminate the contract for material breach.

D&G should have obtained consent from the Authority for anything other than disposal of the vehicle by crushing. Previous such permissions had been granted, but in different circumstances, and that did not excuse D&G’s failure to seek permission. This was a clear and serious breach of the express terms of the contract governing disposal.

The court also found that there had been a clear breach of an implied term to act with integrity, although he was not satisfied that there had been dishonesty.

Both breaches were sufficiently serious as to entitle the Authority to terminate the contract.

Implied term of honesty and integrity

The existence in this case of an implied term to act with honesty and integrity was accepted by both parties. Nonetheless, the judge considered the legal basis for the implication of that term into the contract.

He referred to the approach taken by Leggatt J in Yam Seng, where a duty of good faith was implied into a distributorship agreement. In that case, Leggatt J approached the implication of the term as part of the exercise of construction of the contract, looking at what the contract, read as a whole against the relevant background, would reasonably and objectively be understood to mean. Importantly, Leggatt J found that the relevant background includes not only matters of fact known to the parties but also shared values and norms of behaviour, including an expectation of honesty and the observance of other generally accepted standards of commercial dealing. Leggatt J referred to what he termed “relational contracts”, such as some joint venture agreements, franchise agreements and long term distributor agreements, which involve a longer term relationship between the parties and which “may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements”.

Dove J emphasised, in line with the approach taken in Yam Seng, that the existence and content of such an implied term is highly sensitive to the context of the contract itself. He found that several features of the particular contract in this case warranted an implied term that the parties would act with honesty and integrity in operating the contract. In particular, the contract was for a relatively lengthy period (initially 5 years), during which there were going to be a very large number of individual transactions undertaken under its auspices; it was, in the judge’s view, a “relational contract par excellence”. Further, it involved D&G acting on behalf of a law enforcement agency in dealing with the recovered property of members of the public, which might either require return to the public or form part of the evidence for criminal investigations and potential prosecutions.

As to the nature of the implied term itself, Dove J stated that he used the term “integrity”, rather as Leggatt J used “good faith”, in order to capture the requirements of fair dealing and transparency required in a contact creating a long-standing relationship of this sort. He said there may well be acts which would breach the requirement of undertaking the contract with integrity but which it would be difficult to characterise as dishonest; those which would compromise the mutual trust and confidence between the parties without necessarily amounting to the telling of lies, stealing or other definitive examples of dishonest behaviour. In Dove J’s view, such acts would amount to behaviour which the parties would, had they been asked, have identified as obvious acts which were inconsistent with the maintenance of their intended long-term relationship of fair and open dealing and therefore amount to a breach of contract.

The judge concluded that, whilst he was not satisfied that there had been dishonesty in this case, there was a clear breach of the implied term in relation to integrity.

Compare jurisdictions: Arbitration

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